What Explains Provisioning Behaviour in the Banking Industry? Evidence from an Emerging Economy

Existing literature shows that several factors drive loan loss provisioning among banks. However, little is known on this topic in the African banking context and specifically Kenya's banking industry. Using hand-collected annual bank-level data for the period 2002 to 2018, this paper investigates whether provisioning behaviour depends on banks' idiosyncratic or systematic factors. The study also investigates whether provisioning is pro or counter-cyclical through business and credit cycles and whether provisioning behaviour is heterogeneous for different bank groups. Estimation results reveal that provisions are used for capital and POLICY BRIEF What Explains Provisioning Behaviour in the Banking Industry? Evidence from an Emerging Economy Peter Muriu October 2023 / No.787 2 Policy Brief No.787 earnings management, but the findings are sensitive to bank size and ownership status. Further, the evidence suggests that provisioning reflects changes in asset quality and is counter-cyclical to the business cycle.